In what some market participants are calling a case of "lawyer overreaction," Warburg Dillon Read and underwriters Lehman Brothers Inc. pulled their $1.37 billion commercial mortgage-backed securities deal from the market last week due to comments made to this newsletter by Warburg official Brian Harris.
A gaggle of eight attorneys representing the issuer and all the co-managers involved decided that certain comments made to MBSL last week by Harris in the article "Swap Spreads Affect Warburg CMBS Deal" (MBSL 3/27/00) might be construed as breaking Securities and Exchange Commission laws.
The deal would have been the inaugural CMBS offering from Warburg, and the first 2000 transaction underwritten by Lehman Brothers.
In particular, Harris' statements in the article about the deal's triple-A 10-year tranche being a "compelling trade" to "writing whole loans" for insurance companies can be considered in violation of SEC laws, sources said. Moreover, investors who could potentially buy the securities on the basis of Harris' statements have a one-year "put" to give the bonds back to the syndicate - which presents a legal liability for the investment banks involved.
Although rumors circulated early last Thursday that the deal was pulled due to rocky market conditions, Lehman issued an official statement midday asserting that the one and only reason it was pulled was because when Harris spoke to MBSL, he might have violated SEC rules governing what can and cannot be said in the midst of a public securities offering.
"Yesterday, Lehman Brothers, Warburg Dillon Read, Morgan Stanley Dean Witter and Deutsche Bank Securities terminated their offering of a series of mortgage-backed securities designated as the LB-UBS Commercial Mortgage Trust, Commercial Mortgage Pass-through Certificates, Series 2000-C1," said Ken Cohen, Lehman's head of CMBS trading in New York, in an official statement.
"This was done in response to an article that recently appeared in the Mortgage-Backed Securities Letter that attributed various statements regarding the transaction to an employee at Warburg Dillon Read.
"In an excess of caution, counsel has advised us that a cooling-off period may be appropriate. That is the sole reason for the termination of the offering."
While it is typical for the business people involved on such transactions to direct the legal teams, market sources say the tables turned this time around. After protracted arguments between the business departments and the legal departments within the firms, the legal side succeeded in pushing through their demands to have the deal terminated.
Sources familiar with the deal say it is "gone" due to "purely technical legal" issues, which is particularly painful for the parties involved since the transaction was slated to be the largest CMBS offering of the year, and most of the triple-A tranches were already spoken for. One Street source noted that the deal "had indications of interest in excess of what [Lehman] could sell."
"Somebody could have put the bonds back to Lehman due to those comments," said Robert Calhoun, co-director of research at fixed-income specialists Tattersall Advisory Group. "Lehman would have been on the hook."
"The business guys lost control of it and the legal guys said, yank it'," another CMBS source noted.
Speculations Complicate Situation
Although it is acceptable for a bank official to reveal specifics about a public deal, such as the average life of a bond or the amount of one of the tranches, sources say that Harris overstepped these boundaries when he spoke to MBSL.
One market player noted that Harris' "flowery descriptive language" regarding the fact that the 10-year triple-A portion of the Warburg deal was "larger than most conduit deals" and the fact that it would appeal to insurance companies was probably in violation of SEC codes. "Insurance companies, who really don't care about Libor, are starting to step in," Harris said in last week's article.
Harris did not return calls from MBSL asking for comments on the situation.
Market players familiar with the deal note that although the probability of investors using their "put" option is "zero," as one source put it, the legal teams behind the deals worried that it was a possibility - though a remote one - and decided to pull the plug.
What compounded the situation was the fact that the legal counsel from all of the firms involved originally insisted that nobody talk about the true reason behind the shelving of the deal to anybody, which led to massive speculation from the press.
Some news organizations reported that it was pulled due to the wildly volatile swap market, while others speculated that the A/B note structure on the deal was somehow defective.
According to market participants, this rampant guessing damaged the reputations of the involved banks, which irked the bankers involved in it, and after hours of meetings, Lehman and Warburg decided to issue an official statement revealing the true reason.
"It's ridiculous to think that a deal would have been yanked because spreads widened three basis points further the last couple of days," said one buyside source reacting to the story.
While several sources implied that the lawyers involved "overreacted," it was clear that Warburg parent Union Bank of Switzerland was even more strict and sensitive for this particular deal, because it was the inaugural CMBS offering from the company.
"This was purely a nightmare scenario to live through," said one market player. "But once all the attorneys are involved - and you have a ton of them - they basically said, There's no choice but to pull the deal.'"
Lehman had gone out with price talk at the beginning of last week, but never officially launched the deal. While the deal is gone for now, lawyers for the involved parties are purportedly still trying to figure out if and when the deal can be resurrected.